Quantitative Easing has its flaws and risks, but our crisis would have been
far deeper without it.

After the May 2010 general election, a famous note was found on a desk in the Treasury. It was left by the departing Labour chief secretary, Liam Byrne. “I’m afraid to tell you,” he wrote to his successor, “there’s no money left. Kind regards – and good luck!”

On Wednesday, George Osborne will deliver his Autumn Statement on the condition of the economy. Throughout his time in office, he has been wrestling with the problem so baldly stated by Mr Byrne. Once Gordon Brown had finished with the British public finances, there was, indeed, no money left. The Chancellor will tell Parliament that his forecasts for reducing the national debt and the budget deficit have slipped. His message will be severe. More cuts will be required.

But Mr Osborne will probably say very little about his main economic policy. Building on what Mr Brown started in 2009, the Government relies on a startling answer to the Liam Byrne problem. It makes money up.

As the Bank of England website explains, money has been “created electronically”. By the method known as Quantitative Easing (QE), the Bank invents money with which to buy government bonds off pension funds, insurance companies etc. They then use that money to invest in things that earn more, hoping to get the economy moving. The wheeze is a godsend for Mr Osborne: he can shift gilts, seemingly without pain, to fund his deficit. So far, the Bank has conjured up £375 billion. Britain’s QE experiment is, proportionately, even bigger than that of the United States or Japan.

Three weeks ago, in a technical but politically timed move, the Treasury quietly recycled to itself the only bit of “real” money in all of this – the interest it was paying to the Bank on these transactions. This made the public finances look £37 billion better off. It quantitatively eased its own Quantitative Easing.

We have been here before, sort of. The £50 note, introduced last year, commemorates Matthew Boulton and James Watt. Sir Mervyn King, the current Governor of the Bank of England, personally chose to honour their historic partnership of entrepreneur and inventor thus. Perhaps he was also smiling inwardly at the fact that Boulton and Watt were employed, just after the Napoleonic wars, to “overstrike” old Spanish dollars from the Bank’s vaults. Those dollars were then passed off as good old sterling silver. That, like QE, was a form of money-printing.

Is this all very wicked? If it is, we are run by the wickedest government in our history: the amounts of money “printed” are by far the largest ever. If, a mere five years ago, you had asked Sir Mervyn or Mr Osborne whether they proposed to crown their careers by inventing money equivalent to a quarter of our annual GDP, they would have laughed incredulously.

The case against QE is strong. As the Bank itself admits, it makes life miserable for pensioners and savers. It has not yet greatly increased the flow of credit, especially to small businesses. There is a trickle of inflation, and critics worry that it will, quite suddenly, turn into a tidal wave. It is dangerous.

There is a democratic problem, too. The policy is presented as the Bank’s. Since 1997, we have learnt to believe we have an independent Bank of England. Gilt markets would take fright if they thought Britain had gone back on this. So Quantitative Easing, which sounds obscurely scatological, is passed off as an inside-the-trade matter from which we, the public, can avert our eyes.

Yet QE helps entwine the Bank with the Government. Monetary policy has taken over much of the role usually assigned to fiscal policy. The Governor, reluctantly, is playing an unprecedentedly important role in how we run the country. The Chancellor is trying to keep the Bank looking independent while covertly trying to ensure that it implements his wishes.

Since QE was introduced, the Bank has offered several different explanations for what it does, and the Government has tried not to talk about it. We haven’t had such an unmentionable policy since shadowing the Deutschmark in the late 1980s. Only now, pressed by the bright new MP Andrea Leadsom, has the Commons Treasury Select Committee said it will let some daylight in upon the magic.

Like most of my fellow citizens, I have no training whatever in finance or economics. (Readers who do will by now have spotted as much.) But I am frustrated that the economics profession, which has suffered its own collapse of credit, does so little to explain. So please forgive my stupid questions.

One is, “We invented this money to lend to ourselves. Are we seriously going to pay it back?” If we cancelled it, we would reduce the national debt by a third: why don’t we? Why can’t we behave like God in the funeral service: “The Lord giveth, and the Lord taketh away… Blessed be the name of the Lord.”?

The answer, from the people who know best, is that this would just be too much for the markets. It would turn modern Western magic into witch-doctoring. It would be “Zimbabwean”. Our long-nurtured credibility would collapse.

I am sure they are right, for the time being, though I cannot believe that, in the longer term, we shall make future generations pay real money for the money our generation made up. But what interests me is that no one puts an absolute limit on these things. Rather, it is all a matter of trust, of confidence.

This brings us to the heart of why, despite the uneasiness most of us feel, QE is not wicked. It is needful, possibly even brilliant. Money, in modern civilisation, is not, and should not be, “objective”. If it is defined in relation to a commodity such as gold, it becomes the master, not the servant. In a depression, it is the hardest master.

We live, thank goodness, by what is called “fiat” money, by the currency which each nation creates and agrees to use. We use it because we believe in the authority of those who issue the money, just as we accept that we must drive on the left – because that is the rule, and we want to stay alive.

The authority that issues the money will sometimes print too much, and produce inflation, or too little, and produce deflation. The latter is what happened after the credit crunch, because banks froze. The deleveraging was so fierce that we had to rush in the remedy for what we had destroyed. The markets had to believe in that remedy. So far, they have done so.

Without QE, our recession would have exceeded the slump of the Thirties. A country like Spain, whose financial problems are quite like our own, has 25.6 per cent unemployment, and no means of getting out of it because it has no authority over the currency it uses. It is a terrible credit risk.

We aren’t. The world buys our government’s bonds at low yields. We have 7.8 per cent unemployment. We are certainly in a mess, and Mr Osborne is not getting us out of it fast. But we have kept the freedom to correct our own errors, as the stricken eurozone members have not, and we are using it.

QE is a very alarming device, but in wars, alarming devices are needed, and we have been in an economic war since 2008. We have to keep calm and carry on. Next year, Mark Carney will fly in from cautious Toronto where QE has not been needed, and replace Sir Mervyn. Things will get exciting if he does not agree with the way the Old Country is fighting the war.